18% Penalty – 1

Under the Texas Prompt Payment of Claims Act, what is subject to the 18% penalty?  This will be a multi blog topic.

Courts are split on the issue of whether the 18% award is subject to prejudgment interest.  See the difference in 1995, Fort Worth Court of Appeals opinion, Marineau v. General American Life Ins. Co. and the 1997, Eastern District of Texas opinion styled, Teate v. Mutual Life Ins. Co. of New York.

The cases that consider the issue and decline to award prejudgment interest do so based on their reasoning that the 18% award is punitive in nature.  The courts reason that because punitive damages are inherently penal they should not be enlarged by the imposition of prejudgment interest.  For support, look at the 1999, Tyler Court of Appeals opinion Dunn v. Southern Farm Bur. Cas. Ins. Co. and the 2000, Dallas Court of Appeals opinion, Texas Farmers Ins. Co. v. Cameron, and the 2000, San Antonio Court of Appeals opinion, J.C. Penny Life Ins. Co. v. Heinrich.

However, in a case supporting the award of prejudgment interest on the 18%, the court in the 1997, Texarkana Court of Appeals opinion, Bekins Moving & Storage Co. v. Williams, the court considered the 18% to be an element of actual damages, subject to prejudgment interest like other elements of actual damages.

As a result, the courts thus seem to have determined that the availability of prejudgment interest depends on whether the 18% award is considered punitive or remedial.

The statute itself does not expressly say whether the 18% is a penalty or compensation.  There is no clear legislative history found.

As a practical matter, the statute has both effects.  To encourage prompt payment of claim, it certainly has the effect of motivating an insurance company by imposing a penalty.  On the other hand, the whole reason to encourage prompt payment of claims is to make sure that insureds are compensated.